UPDATE Court: School districts can keep excess tax revenue

LITTLE ROCK — School districts that receive property tax revenue in excess of the state-mandated school funding level can keep the money, a divided state Supreme Court said Thursday in a ruling that some feared could have significant consequences for the state’s approach to school funding.

In a 4-3 decision, the court said the Fountain Lake and Eureka Springs school districts do not have to surrender excess money collected through a statewide 25-mill property tax to the state Department of Education.

Dissenting justices said the decision appeared to contradict previous court rulings that public schools must be funded in an equitable manner. Gov. Mike Beebe called the decision “just wrong.”

The districts sued the department in May 2011, arguing that any attempt to demand revenues from the tax in excess of state-mandated funding level, which was $6,023 per student in the 2010-11 school year, was illegal and unconstitutional.

Most districts collect less than the per-student funding amount in tax revenue and receive state funding to make up the difference, but Fountain Lake and Eureka Springs exceeded the mandated amount, and the Department of Education claimed the districts had to surrender the excess funds.

In oral arguments before the state Supreme Court last month, an attorney for the districts argued that state law requires property tax revenue collected in a district to go to that district.

An attorney for the state argued that the court’s ruling in the long-running Lake View school funding lawsuit established that public school funding must be distributed in an equitable manner and said the 25-mill tax, which is required under Amendment 74 to the state constitution, is not intended to benefit affluent districts more than poor districts.

A majority of the Supreme Court justices agreed with the districts and upheld a ruling by Pulaski County Circuit Judge Tim Fox that the districts did not have to surrender the money.

“Pursuant to our constitution, URT (uniform rate of tax) revenues must be distributed as provided by law, and the General Assembly has seen fit to authorize and set forth a procedure that, at least currently, requires that those funds be returned to the sole district from which they were derived,” Justice Paul Danielson wrote in the majority opinion.

Danielson wrote that “should the General Assembly wish to provide a mechanism or procedure by which excess funds may be distributed to other districts, it is certainly within its purview to do so.”

The majority also agreed with the districts’ argument that money collected through the tax is not state revenue.

“There simply is no basis on which to find that the URT is a state ad valorem tax,” Danielson wrote. “Instead, it is a one-of-a-kind tax, a school district tax, approved by the voters of the state of Arkansas, and levied, assessed and collected by the counties for the sole use of the school districts.”

Chief Justice Jim Hannah, Justice Robert Brown and Special Justice George Ellis, filling in for Justice Jim Gunter, who did not participate, all wrote opinions explaining their dissent.

“The majority nullifies 10 years of difficult and painstaking work diligently undertaken by the General Assembly, the Department of Education, the attorney general and the governor to provide this state with a constitutional school funding system,” Hannah wrote. “The state’s carefully crafted constitutional system of state-funded public education is obliterated by the majority’s decision.”

Brown wrote that although districts are free to pass their own taxes in excess of the mandated 25 mills and keep the revenue, for the state to allow a statewide tax to benefit affluent districts disproportionately is “at odds with Amendment 74, state statutes and this court’s case law.”

Brown said the majority opinion returns the state to a standard “where property wealth can be used by the state of Arkansas to benefit some school districts more than others. I cannot countenance such a sea change in our constitutional law.”

“Decorum prevents me from telling you what I really think about the logic of the majority opinion,” Beebe said.

Beebe was a leading legislator in 2002 when the Supreme Court struck down the state’s old school funding system as constitutionally inadequate and inequitable. He was state attorney general, advising lawmakers on school funding matters, as the Legislature passed massive school reforms and taxes to pay for them in the years after the ruling. He had been elected governor by the time the Supreme Court in 2007 declared the new funding system constitutional.

Beebe said Thursday a petition for rehearing would be filed, but if the decision stands, the door has been opened for backtracking on the principles of equitable distribution established in response to the court’s rulings in the Lake View case.

“They’ve clearly said to folks in the future that want to tinker with this, ‘Go right ahead,’” he said.

Eugene Sayre, attorney for the districts, said the districts were pleased that they would no longer have large claims hanging over the heads. He said that if the districts had lost, Fountain Lake would have had to pay about $2.2 million and Eureka Springs would have had to pay about $1.6 million to cover the past two school years.

Sayre said he disagreed with claims that the ruling invites backtracking on the principles of the Lake View case.

“It clarifies Lake View,” he said.

State Sen. Jimmy Jeffress, D-Crossett, who chairs the Senate Education Committee and has been a legislator since 1997, said he was concerned by the decision. He said that even before Thursday’s ruling he was worried about the possibility of legislators “tinkering with Lake View.”

“A few years now have transpired since the Lake View case was put to rest (in 2007),” he said. “A lot of new members have come into the Legislature because of term limits. They don’t remember the historical things that are behind the whole situation. … That’s just a concern that many of us that are long-timers around there have about it.”